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ECONOMICS RESEARCH 8 July 20
PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES STARTING AFTER PAGE 47
Global Forecasts
Global Synthesis
Global Rates and Inflation
Global Markets Watch
United States
Outlook
InFocus: Auto sector getting out ofreverse gear
Data Preview & Review
Euro Area
Outlook
Data Preview & Review
United Kingdom
Outlook
Data Preview & Review
Japan
Outlook
Data Preview & Review
Emerging Asia
China Outlook
Asia Outlook
InFocus: Thailand A tactical long
Data Preview & Review
EEMEA
Outlook
Data Preview & Review
Latin America
Outlook
Data Preview & Review
Country Snapshots
Global Weekly Calendar
GLOBAL ECONOMICS WEEKLY
Signs of a partial turn Economic data in Japan are improving as the economy is beginning to heal from
the contraction after the earthquake.
US manufacturing data are bottoming out as the temporary factors impedinggrowth are starting to fade.
We have downgraded our GDP forecast for the euro area, and look for apersistent slowing in growth, in part due to the effects of tighter fiscal policy.
In China, we believe that policy firming and tighter credit conditions are alsoyielding a more lasting slowing in growth than in the US or Japan.
Developed Economies
United States: A production turn - To everything there is a season 7
A V-shaped recovery appears to be taking hold in Japan, easing supply chain
disruptions to auto production and sales in the US.
Euro area: Austerity hurts and inflation bites 13
Following the strong growth in Q1 this year, and given what we believe was a weak Q2,
real GDP growth in H2 is set to be more modest than thought previously.
UK: Q1 wan, Q2 too 17
The available data suggest that growth in Q2 was even weaker than the disappointing
0.5% expansion in Q1, and we now expect growth to have been just 0.2% q/q.
Japan: An interim assessment 20
The BoJ will re-visit its GDP and CPI forecasts next week, likely projecting modest real
growth and core inflation for FY11. This will not reflect the CPI rebasing.
Emerging Markets
China: Rate hike cycle close to an end 23
The PBoC delivered an overdue benchmark interest rate hike on Wednesday, ahead of the
release of the June CPI data, which we expect to jump to 6.3% y/y from 5.5% in May.
Emerging Asia: Inflation pains linger on 25
Bank Negara Malaysia kept rates on hold due to moderation in external demand. We
expect the central bank to raise the policy rate 25bp in September.
EEMEA: Doves rule as inflation peaks and growth slows 31
Global commodity prices are moderating and prospects for local harvests are improving.
Latin America: A currency war again? Yes, but not for long. 36
As commodity price pressures dissipate and headline inflation moves south, the
crusade against currency appreciation is starting to re-emerge in the Latin region.
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8 July 2011 2
GLOBAL FORECASTS
1Q11 2Q11 3Q11 4Q11 1Q12 2010 2011 2012 1Q11 2Q11 3Q11 4Q11 2010 2011 2012
Global 4.2 3.2 3.9 4.2 4.4 4.9 4.0 4.3 3.4 4.0 4.0 3.7 2.6 3.8 3.0
Developed 1.6 1.2 2.4 2.9 2.8 2.5 1.8 2.7 2.1 2.8 2.9 2.8 1.4 2.7 1.9
Emerging 7.4 5.6 5.7 5.9 6.2 7.9 6.6 6.2 6.3 6.4 6.4 5.7 5.3 6.2 5.3
BRIC 7.6 6.8 7.1 6.8 7.5 8.9 7.6 7.4 6.6 6.9 6.7 5.4 5.0 6.4 5.1
America 3.0 2.7 3.1 3.6 3.7 3.7 3.1 3.6 3.4 4.3 4.5 4.3 2.8 4.1 3.5
United States 1.9 2.0 3.0 3.5 3.5 2.9 2.5 3.4 2.1 3.4 3.6 3.4 1.6 3.1 2.4
Canada 3.9 2.5 2.5 2.5 2.5 3.2 2.9 2.5 2.6 3.3 3.2 3.1 1.8 3.1 2.2
Latin America 5.7 4.6 3.3 4.3 4.4 6.2 4.7 4.1 8.3 7.9 8.2 8.2 7.5 8.1 7.9
Argentina 11.8 4.0 2.0 5.5 4.3 9.2 7.6 4.2 25.3 23.3 22.6 22.9 21.5 23.5 26.1
Brazil 5.4 2.9 3.4 4.5 4.5 7.5 3.8 4.2 6.1 6.6 7.1 6.6 5.0 6.6 5.7
Chile 5.4 5.0 5.0 5.0 4.5 5.2 6.4 4.5 2.9 3.2 3.5 4.0 1.4 3.4 3.0
Colombia 9.8 5.5 3.0 4.5 5.0 4.3 5.7 4.6 3.2 3.0 3.2 3.2 2.3 3.2 3.3
Mexico 2.1 6.5 3.0 3.0 4.0 5.4 3.9 3.7 3.5 3.3 3.7 3.6 4.2 3.5 4.0
Peru 6.6 5.7 4.6 5.4 4.0 8.8 6.4 5.2 2.3 2.9 3.0 3.6 1.5 2.9 3.1
Venezuela 6.9 4.4 5.0 4.6 5.6 -1.4 4.3 3.5 28.2 22.8 23.0 24.3 28.2 24.5 21.9
Asia/Pacific 6.3 4.7 6.4 6.9 6.9 8.1 6.0 6.5 3.4 3.8 3.6 2.8 2.3 3.4 2.7Japan -3.5 -2.3 3.7 5.0 4.4 4.0 -0.5 3.2 -0.2 0.5 0.5 0.0 -1.0 0.2 0.1
Australia -4.7 4.6 4.9 4.0 4.1 2.7 1.4 4.0 3.3 3.8 4.1 4.5 2.8 3.9 3.3
Emerging Asia 9.3 6.5 7.2 7.5 7.6 9.3 7.8 7.4 5.4 5.7 5.3 4.2 4.1 5.1 4.1
China 9.4 7.8 8.0 9.5 8.7 10.4 9.3 8.7 5.1 5.6 5.2 3.4 3.3 4.8 4.0
Hong Kong 11.9 -1.2 4.1 4.7 5.1 7.0 5.5 4.5 4.0 5.2 6.1 5.4 2.4 5.2 4.7
India 8.4 7.6 9.1 5.0 8.8 9.0 7.7 7.9 9.5 9.3 9.2 8.3 9.6 9.1 6.7
Indonesia 4.0 6.0 5.8 9.6 4.4 6.1 6.5 6.4 6.8 5.9 5.0 6.0 5.1 5.9 6.0
South Korea 5.4 4.5 6.2 6.3 3.6 6.2 4.4 4.1 4.5 3.9 3.3 2.8 3.0 3.6 2.1
Malaysia 7.0 4.9 2.5 4.1 5.8 7.3 5.0 5.5 2.8 3.5 3.7 3.9 1.7 3.5 2.2
Philippines 15.0 4.8 4.0 -0.1 10.3 7.6 5.0 5.3 4.0 4.6 5.1 5.0 3.8 4.7 3.8
Singapore 22.5 0.3 3.0 4.9 4.3 14.5 6.0 4.5 5.2 4.5 3.4 2.8 2.8 4.0 1.8
Taiwan 19.0 0.4 1.9 4.5 4.8 10.9 5.9 4.0 1.3 1.6 1.7 1.8 1.0 1.6 1.9
Thailand 8.4 0.8 2.0 5.1 5.0 7.8 3.6 4.7 3.0 3.6 4.1 4.5 3.3 3.8 2.7
Europe and Africa 3.0 1.8 1.7 1.6 2.1 2.5 2.5 2.4 3.3 3.6 3.8 3.8 2.6 3.6 2.6Euro area 3.4 1.1 1.2 1.6 1.5 1.7 1.9 1.6 2.5 2.7 2.8 2.9 1.6 2.7 1.8
Belgium 4.3 1.7 1.5 2.1 1.8 2.1 2.5 1.9 3.5 3.3 3.7 3.4 2.3 3.5 2.6
France 3.8 0.9 0.8 1.5 2.0 1.4 1.9 1.8 2.0 2.2 2.5 2.7 1.7 2.4 1.7
Germany 6.1 1.7 1.5 1.8 1.6 3.5 3.3 1.9 2.2 2.5 2.6 2.7 1.2 2.5 1.7
Greece 0.7 -2.2 -2.1 -1.0 -0.3 -4.4 -3.8 -0.5 4.5 3.3 3.2 4.2 4.7 3.8 3.0
Ireland 5.1 -1.4 2.4 1.1 1.8 -0.4 0.4 1.8 0.8 1.4 1.5 1.8 -1.6 1.4 1.4
Italy 0.5 1.1 1.7 1.9 0.6 1.2 1.0 1.1 2.3 2.9 2.7 2.9 1.6 2.7 1.6
Netherlands 3.6 2.1 1.7 1.7 1.9 1.6 2.3 1.9 2.0 2.4 2.8 2.9 0.9 2.5 2.6
Portugal -2.4 -2.6 -2.3 -1.7 -1.1 1.3 -1.7 -1.3 3.7 3.8 3.4 3.7 1.4 3.6 2.4
Spain 1.2 0.3 0.8 1.2 1.4 -0.1 0.7 1.5 3.2 3.3 3.3 3.1 2.0 3.2 2.0
United Kingdom 1.9 0.9 1.0 1.5 1.9 1.4 1.1 1.9 4.1 4.5 4.7 4.9 3.3 4.6 2.9
Switzerland 1.0 1.6 1.6 1.2 1.6 2.6 2.0 1.4 0.2 0.2 0.7 0.8 0.7 0.5 1.1
EM Europe & Africa 2.8 3.9 3.0 1.9 3.4 4.6 4.4 4.2 6.3 6.9 7.3 6.8 5.8 6.8 5.9
Czech Repub. 3.6 2.6 2.4 2.4 3.8 2.2 2.8 3.3 2.0 1.9 2.2 2.3 1.4 2.1 2.3Hungary 6.2 1.7 1.4 1.2 2.9 1.1 2.6 3.2 4.1 4.3 4.0 3.9 4.9 4.1 3.6
Poland 4.1 3.6 3.7 3.7 3.7 3.8 3.9 3.7 3.8 4.6 4.8 4.6 2.7 4.6 3.5
Russia 0.9 5.0 3.3 0.9 3.3 4.0 4.3 4.6 9.6 9.7 9.1 8.2 6.9 9.1 7.1
Turkey 3.7 2.3 1.7 1.2 2.9 9.0 5.8 4.1 4.3 6.5 9.0 8.5 8.6 7.1 7.1
Israel 4.7 4.0 4.0 4.0 4.8 4.9 5.0 4.2 3.9 3.8 3.8 3.7 2.6 3.9 3.2
South Africa 4.8 3.5 3.7 3.9 4.1 2.8 3.9 4.1 3.8 4.5 5.7 6.0 4.3 5.0 6.0
Consumer prices% annual chg
Real GDP% over previous period, saar
Consumer prices% over a year ago
Real GDP% annual chg
Note: Arrows appear next to numbers if current forecasts differ from that of the previous week by 0.5pp or more for quarterly annualized GDP, by 0.2pp or more forannual GDP and by 0.2pp or more for Inflation. Weights used for real GDP are based on IMF PPP-based GDP (2008-2010 average). Weights used for consumer pricesare based on IMF nominal GDP (2008-2010 average). Source: Barclays Capital
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8 July 2011 3
GLOBAL SYNTHESIS
Signs of a partial turn
We estimate that Q2 11 was the weakest quarter for real global GDP growth since the
recession, and that the slowdown has been widespread across economies. We look formoderately stronger Q3 11 growth, but that turn up is expected to be limited in scope.
Some reasons for the growth slowdown are expected to be short-lived, notably, the effects
of the Japanese earthquake and the energy price surge earlier this year. However, other
factors, such as the effect of fiscal tightening in Europe and that of monetary tightening in
China, are likely to persist. As a result, we expect the Q3 11 growth improvement to be led
by Japan and the US, with little improvement in the euro area or China.
Japan beginning to recover
This weeks data showed some more signs of healing in Japan following the abrupt
weakening after the earthquake. The composite index of consumption, which helps in
forecasting GDP-based consumption, increased 0.3% in May after a 1.9% rise in April and
has now retraced more than half of its March drop (Figure 1). New auto sales gained 15.7%
m/m in June after a 29.6% climb in May, and have now reversed about 80% of the post-
earthquake decline. While we still expect a 2.3% annualized drop in real GDP growth in
Q2 11, the moves up in the consumption-related series suggest we are on track for a turn to
significantly positive GDP growth in Q3 11; we look for a 3.7% annualized gain.
US manufacturing growth appears to be bottoming out
We expect US economic growth to be weak again in Q2 11; our tracking estimate stands at
an annualized 1.5% pace, below our 2.0% forecast. However, the past week did bring some
tentative signals that the slowdown in the manufacturing sector and consumer spending
may be starting to ease. After three consecutive declines, the ISM manufacturing index rose
to 55.3 in June from 53.5 in May, suggesting that the worst of the manufacturing slowdownis over (Figure 2). The June employment report, however, showed no pickup from Mays
meager job growth; indeed, private sector job growth edged down to 57k from 73k. We
interpret the labor market weakness as a lagged response to the H1 11 slowdown in real
Dean Maki
+1 212 526 [email protected]
Figure 1: Japanese consumption indicators moving up Figure 2: US manufacturing is bottoming; employment is not
100
150
200
250
300350
400
450
500
Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
104
105
106
107
108109
110
111
112
Japan auto salesReal consumption index, rhs
Thous Index 2000=100
-1000
-800
-600
-400
-200
0
200
400
Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
10
20
30
40
50
60
70
Change in private payrollsUS ISM manufacturing, rhs
1m change, Thous Index
Source: Cabinet office, JAMA, JMVA, Haver Analytics, Barclays Capital Source: BLS, ISM, Haver Analytics
Japanese consumption data are
improving
Manufacturing data in the US
have started to modestly
improve
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8 July 2011 4
GDP growth, so the growth data need to turn stronger before the labor market improves.
While limited supply from Japan automakers continued to weigh on US auto sales in June,
chain store sales grew solidly in June as gasoline prices fell; next weeks reading on core
retail sales will give more information on this front. Overall, while the US data are mixed, we
read them as consistent with our forecast of a modest H2 11 pickup in growth.
No upturn is imminent in the Euro area or China
We look for no improvement in growth in Q3 11 in the euro area or in China, as we believe
their slowing is less driven by temporary factors than is that in Japan and the US. In line with
this view, the incoming data have remained soft in these regions. In the euro area, domestic
demand appears to be weakening; after a weak May retail sales report, our consumption
tracking indicator is pointing to a 0.2% contraction (not annualized) in real consumer
spending in Q2 11 (Figure 3). Euro area growth is being slowed, in large part, by factors that
are likely to be sustained, such as tighter fiscal policy across almost all countries, as well as
a slowdown in foreign demand for autos, particularly in Asia, that seems related mainly to
tighter monetary policy and credit conditions there. This week, we modestly downgraded
our euro area growth forecast and now look for growth of 1.9% (from 2.0%) in 2011 and
1.6% (from 1.8%) in 2012. Despite the modest growth outlook, inflation remains above theECBs target, and, this week, it delivered another 25bp rate hike, as expected. We continue
to look for the ECB to pause for several months before raising rates again in December.
In China, the persistent monetary firming and resulting tighter credit conditions continue to
yield moderation in growth. The NBS PMI index fell to a 28-month low in June, and the
slowdown in China is clearly having an effect on exporters reliant on Chinese growth. For
example, this week Taiwanese trade data showed that exports to China slowed to 8% y/y in
Q2 11, the weakest pace in nearly two years (Figure 4). The PBoC remains focused on
inflation as the main policy risk, and this week delivered the rate hike we had been
expecting. While we believe the rate hike cycle is nearing an end, we do not rule out another
rate hike in Q3 11, especially if inflation fails to moderate as we expect. Overall, we expect
the PBoC to succeed in moderating Chinese growth, and look for a further slowing to 8.7%in 2012 from 9.3% this year. Thus, unlike in Japan and the US, where we believe growth has
slowed for temporary reasons, policy tightening in the euro area and China seems likely to
yield a more persistent slowing in growth.
Tighter fiscal policy in the euro
area means growth will slow
more persistently
Figure 3: Euro area consumption weakening in Q2 11 Figure 4: China slowing shows in Taiwan exports
-1.0
-0.5
0.0
0.5
1.0
1.5
99 00 01 02 03 04 05 06 07 08 09 10 11
Euro area private consumption % q/q
BarCap priv. cons. tracking indicator
Q2 estimate: -0.2% q/q
-50
-30
-10
10
30
50
70
90
Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11
40
42
44
46
48
5052
54
56
58
60Taiwan exports to China
China PMI manufacturing, rhs
4Q % change Index
Source: Eurostat, Haver Analytics, Barclays Capital Source: MoF, CFLP/NBS, Haver Analytics
Tighter monetary policy in China
is slowing growth in a
lasting way
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8 July 2011 5
GLOBAL RATES AND INFLATION
Central Bank rates
Official rate Next move
% per annum (unless stated) Current date level Last move expected 3Q 11 4Q 11 1Q 12 2Q 12
Advanced
Fed funds rate 0-0.25 Easing: 17 Sep 07 5.25 Dec 08 (-75-100) Jul 12 (+25) 0-0.25 0-0.25 0-0.25 0-0.25
BoJ overnight rate 0.10 Easing: 30 Oct 08 0.50 Oct 10 (0-10) Q1 13 (+20) 0-0.10 0-0.10 0-0.10 0-0.10
ECB main refinancing rate 1.50 Tightening: 7 Apr 11 1.00 Jul 11 (+25) Dec 11 (+25) 1.50 1.75 2.00 2.25
BOE bank rate 0.50 Easing: 6 Dec 07 5.75 Mar 09 (-50) May 12 (+25) 0.50 0.50 0.50 0.75
RBA cash rate 4.75 Tightening: 7 Dec 09 3.00 Nov 10 (+25) Q3 11 (+25) 5.00 5.25 5.25 6.25
Swiss National Bank 0.25 Easing: 8 Oct 08 2.75 Mar 09 (-25) Q3 12 (+25) 0.25 0.25 0.25 0.50
Norges Bank 2.25 Tightening: 29 Oct 09 1.25 May 11 (+25) Q3 11 (+25) 2.50 2.75 3.00 3.25
Riksbank 2.00 Tightening: 30 Jun 10 0.25 Jul 11 (+25) Q3 11 (+25) 2.25 2.50 2.75 3.00
Bank of Canada 1.00 Tightening: 1 Jun 10 0.25 Sep 10 (+25) Dec 11 (+25) 1.00 1.25 1.75 2.25
Emerging
China: Working capital rate 6.56 Tightening: 19 Oct 10 5.31 Jul 11 (+25) Q3 12 (+25) 6.56 6.56 6.56 6.56
Hong Kong: Base rate 0.50 Easing: 19 Sep 07 6.75 Dec 08 (-100) Beyond 2011 0.50 0.50 0.50 0.50
India: Repo rate 7.50 Tightening: 19 Mar 10 4.75 Jun 11 (+50) Q3 11 (+25) 7.75 7.75 7.75 7.75
Korea: Base Rate 3.25 Tightening: 9 Jul 10 2.25 Jun 11(+25) Sep 11 (+25) 3.75 3.75 3.75 3.75
Poland: 2w repo rate 4.50 Tightening: 19 Jan 11 3.50 Jun 11 (+25) Sep 11 (+25) 4.75 4.75 4.75 4.75
Russia: Refi rate 8.25 Tightening: 25 Feb 11 7.75 Apr 11 (+25) June 12 (-25) 8.25 8.25 8.25 8.00
South Africa: Repo rate 5.50 Easing: 11 Dec 08 12.00 Nov 10 (-50) Jan 12 (+50) 5.50 5.50 6.50 7.00
Turkey: 1wk repo rate 6.25 Easing: 20 Nov 08 16.75 Jan 11 (-25) Oct 11 (+25) 6.25 7.00 8.00 8.00
Brazil: SELIC rate 12.25 Tightening: 19 Jan 11 10.75 Jun 11 (+25) Jul 11 (+25) 12.75 12.75 12.75 12.75
Chile: Monetary policy rate 5.25 Tightening: 15 June 10 0.50 Jun 11 (+25) Jul 11 (+25) 5.50 5.50 5.50 5.50
Mexico: Overnight rate 4.50 Easing: 16 Jan 09 8.25 Jul 09 (-25) Apr 12 (+25) 4.50 4.50 4.50 5.00
Start of cycle Forecasts as at end of
Note: Rates as of COB 7 July 2011. Source: Barclays Capital
Key CPI projections
HICP
nsa y/y nsa y/y y/y nsa y/y y/y nsa y/y nsa y/y nsa y/y
Aug 10 218.3 1.1 224.5 4.7 3.1 109.54 1.53 1.6 119.97 1.32 302.06 0.9 99.1 -1.0
Sep 10 218.4 1.1 225.3 4.6 3.1 109.76 1.71 1.9 119.88 1.49 304.60 1.4 99.1 -1.1
Oct 10 218.7 1.2 225.8 4.5 3.2 110.16 1.84 1.9 120.03 1.52 305.57 1.5 99.5 -0.6
Nov 10 218.8 1.1 226.8 4.7 3.3 110.27 1.84 1.9 120.09 1.50 306.58 1.8 99.4 -0.5
Dec 10 219.2 1.5 228.4 4.8 3.7 110.93 2.14 2.2 120.61 1.69 308.73 2.3 99.4 -0.4
Jan 11 220.2 1.6 229.0 5.1 4.0 110.11 2.19 2.3 120.32 1.69 306.15 2.5 99.0 -0.2
Feb 11 221.3 2.1 231.3 5.5 4.4 110.57 2.28 2.4 120.90 1.61 308.02 2.5 98.9 -0.3
Mar 11 223.5 2.7 232.5 5.3 4.0 112.11 2.77 2.7 121.90 1.94 310.11 2.9 99.4 -0.1
Apr 11 224.9 3.2 234.4 5.2 4.5 112.75 2.89 2.8 122.32 2.02 311.44 3.3 99.8 0.6
May 11 226.0 3.6 235.2 5.2 4.5 112.74 2.76 2.7 122.40 1.97 312.44 3.5 99.9 0.6
Jun 11 225.6 3.5 236.0 5.3 4.5 112.67 2.71 2.7 122.45 2.02 312.36 3.4 99.7 0.4
Jul 11 225.6 3.5 235.9 5.5 4.6 112.17 2.62 2.7 122.27 2.16 312.05 3.7 99.6 0.6
Aug 11 226.2 3.6 237.1 5.6 4.5 112.51 2.71 2.8 122.71 2.28 312.27 3.7 99.7 0.6
Sep 11 226.7 3.8 238.8 6.0 5.0 113.02 2.97 2.9 122.82 2.45 314.69 3.6 99.4 0.3
Oct 11 226.4 3.5 240.0 6.3 5.1 113.43 2.97 3.0 123.18 2.62 316.20 3.8 99.5 0.0
Nov 11 226.3 3.4 241.2 6.3 5.1 113.47 2.90 2.9 123.19 2.58 316.39 3.5 99.4 0.0
Dec 11 226.4 3.3 241.3 5.6 4.5 113.89 2.67 2.7 123.61 2.49 317.29 3.1 99.5 0.1
Jan 12 227.0 3.1 240.4 5.0 3.8 112.75 2.40 2.5 123.03 2.25 316.45 3.4 99.1 0.1
Feb 12 227.8 2.9 241.9 4.6 3.4 113.03 2.22 2.3 123.35 2.03 318.01 3.2 99.1 0.2
Mar 12 228.6 2.3 243.4 4.7 3.5 114.17 1.84 1.9 124.02 1.74 319.39 3.0 99.6 0.2
2010 1.6 4.6 3.3 1.5 1.6 1.5 1.2 -1.0
2011 3.1 5.6 4.6 2.7 2.7 2.2 3.3 0.4
2012 2.4 4.3 2.9 1.7 1.8 1.6 3.1 0.2
US UK Euro area France
CPI HICPxRPI CPI
Sweden
CPI ex tobacco
Japan
CPI CPI ex perishibles
Note: Shaded values indicate actual data. R indicates revision to front-month forecast. Source: Barclays Capital
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8 July 2011 6
GLOBAL MARKETS WATCH
Global Equities
Rates, Credit and Commodities Global FX
1-week
Index (% chng) Local Curr USD
Global Weighted Avg. 0.7 5.2 3.5
Developed Weighted Avg. 0.7 0.0 1.9
Emerging Weighted Avg. 0.7 7.9 5.7
BRIC Weighted Avg. 0.2 -7.6 0.2
United States S&P 500 2.5 21.4 21.4
Euro area FTSE Euro 100 1.1 4.3 4.5
Japan Nikkei 225 2.6 -4.5 8.6
UK FTSE 100 1.8 11.9 10.5
Emerging Asia Weighted Avg. 1.2 3.8 1.3
China Shanghai Comp. 1.2 -14.7 -10.0
India NIFTY 1.4 10.1 9.8
Korea KOSPI 3.8 29.6 41.8
EMEA Weighted Avg. 1.3 20.6 16.6
Russia MICEX 4.4 27.0 36.7
Turkey ISE 1.3 21.3 12.4
South Africa JALSH 1.4 16.7 29.4
Latin America Weighted Avg. 0.1 3.1 0.6
Brazil Bovespa -0.3 -9.3 1.7
Mexico IPC 0.1 13.9 12.4
% chng from 12/31/2009
Note: Updated as of COB 7 July 2011. Weighted averages calculated using IMFshare of world GDP. EM Asia includes China, India, HK, Indonesia, Korea,Malaysia, Singapore, Taiwan, Thailand and Vietnam. EMEA includes Russia,Czech Republic, Hungary, Poland, Romania, Turkey, Ukraine and South Africa.LatAm includes Brazil, Argentina, Chile, Colombia, Mexico, Peru and Venezuela.Source: Bloomberg, Barclays Capital
Key USD Exchange Rates
80
85
90
95
100
105
Jul-10 Oct-10 Jan-11 Apr-11 Jul-11
Index: July 7 2010 =100
USD/JPY
USD/EUR
USD/GBP
US Treasury Yields
0
2
4
6
%
3m 2yr 5yr 10yr 30yr
Jul 1, 2007
Jan 1, 2008
July 7, 2011
Source: Bloomberg, Barclays Capital
1 week 3 months 12 months
Latest ago ago ago
Rates
2 year Treasury 0.47 0.46 0.78 0.63
10 year Treasury 3.14 3.16 3.55 2.98
30 year Treasury 4.37 4.37 4.62 3.96
Overnight LIBOR 0.12 0.13 0.16 0.29
3-month LIBOR 0.25 0.25 0.29 0.53
Spread 3M LIBOR over 3M OIS 0.14 0.13 0.17 0.34
Credit
Barclays Global Aggregate 68.8 67.5 56.3 63.0
Barclays US Aggregate 56.1 56.1 49.2 56.6
Barclays EM Aggregate 297.3 301.1 266.0 360.9
Barclays US Credit 138.7 141.5 127.7 178.7
Barclays US Corporate IG 150.9 154.6 137.5 192.2
Commodities
CRB/Reuters Commodities Index 553.4 550.3 578.1 419.9
WTI 98.67 95.42 110.30 74.07
Gold 1532.4 1500.4 1458.1 1202.8
Barclays Metals Total Return Index 170.1 166.0 169.0 121.8
Barclays Agri. Total Return Index 173.7 170.4 188.9 120.3
Note: Updated as of COB 7 July 2011. Barclays indices expressed in option-adjusted spreads. Source: Bloomberg, Barclays Capital
1-week 3-month 12-month
Spot % Chg. % Chg. % Chg.
G7 Rates
DXY Dollar Index 74.96 0.9 -0.8 -10.6
EUR/USD 1.44 -1.0 0.4 13.7
USD/JPY 81.25 0.9 -4.3 -7.4
GBP/USD 1.60 -0.5 -2.1 5.2
USD/CHF 0.84 0.5 -7.9 -19.7
USD/CAD 0.96 -0.5 0.1 -8.4
USD/AUD 0.84 0.5 -7.9 -19.7
USD/NZD 1.20 -0.5 -6.6 -15.6
Selected EM Rates
USD/KRW 1064 -0.3 -2.2 -13.0
USD/CNY 6.47 0.0 -1.2 -4.6
USD/BRL 1.55 -0.6 -2.0 -12.1
USD/RUB 27.91 0.2 -1.1 -10.1
USD/INR 44 -0.6 0.5 -5.6
USD/TRY 1.62 -0.4 7.0 4.2
USD/MXN 11.54 -1.5 -2.0 -10.1
Note: Updated as of COB 7 July 2011. DXY Dollar Index consists of EUR (57.6%),JPY (13.6%), GBP (11.9%), CAD (9.1%), SEK (4.2%) and CHF (3.6%).Source: Bloomberg, Barclays Capital
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OUTLOOK: UNITED STATES
A production turn: To everything there is a season
A V-shaped recovery appears to be taking hold in Japan, easing supply chaindisruptions to auto production and sales in the US.
However, the US private sector is behaving cautiously; nominal consumer spendinggrowth has held up, but labor market conditions took another step back in June.
The outcome of the debt ceiling negotiations and the potential for a cautiousconsumer remain the most pressing risks to a second-half recovery.
Given the link between supply constraints in Japan and the slowdown in US growth, it is
worth monitoring developments in Japan that may foreshadow a turn in US production.
Incoming data in Japan suggest that a recovery from the steep earthquake-induced
slowdown in March and April is underway. New auto sales rose a seasonally adjusted 29.5%
and 15.7% in May and June, respectively, and core private-sector machinery orders rose
3.0% in May after falling 3.3% in April. These data come on the heels of last weeksindustrial production report, which indicates that Japanese output is now close to pre-
earthquake levels. Although uncertainties remain, our Japan economists continue to expect
a V-shaped recovery to take hold in the second half of this year and extend into Q1 12.
A time to rebuild
If the incoming data in Japan are indicative of a turning point, then the constraints on US
growth from supply chain disruptions should begin to ease. As we write this week in Auto
sector getting out of reverse gear, supply chain disruptions have had a significant effect on US
vehicle output. Figure 1, for example, shows that the main source of weakness in the April
report on industrial production was autos; we expect the disruption to persist in the May and
June data as automakers return to pre-earthquake production levels. Altogether, we estimate
that the decline in auto production, largely confined to US-based Japanese automakers,
shaved 0.5-1.0pp off Q2 GDP growth. However, we expect the recovery in auto production to
accelerate in July, potentially boosting Q3 GDP growth as much as 1.0-1.5pp.
Michael Gapen
+1 212 526 [email protected]
Figure 1: Supply chain disruptions on auto production
should peak in the second quarter
Figure 2: Comparable chain store sales suggest nominal
spending growth has held up
-0.4
-0.2
0.0
0.2
0.4
0.60.8
1.0
1.2
Jun-10 Sep-10 Dec-10 Mar-11 Jun-11
Manufacturing
Manufacturing ex autos
% m/m
f/c
-10
-8
-6
-4
-2
0
24
6
8
10
05 06 07 08 09 10 11
Chain store sales (ex-Walmart)
Core retail sales6m/6m % chg, saar
Source: Federal Reserve, Haver Analytics Source: ICSC, Census Bureau, Haver Analytics
A V-shaped recovery
appears underway in Japan
Auto production is
set to rebound in July
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A time for resilience, a time for caution
A rebound in auto production is only one part of an expected turn in activity. As we have
frequently written, soft goods production often follows soft goods consumption: the slow
start to goods production in Q2 was also related to the surge in headline inflation that
caused a moderation in real goods consumption in Q1. After rising only 0.4% in April and
declining 2.5% in May, comparable chain store sales rose 1.8% m/m in June (7.0% y/y). As
shown in Figure 2, comparable chain store sales are often a good indicator for the trend in
core retail sales and suggest nominal consumer spending has remained resilient. The
expected rebound in auto sales and the moderation in headline inflation suggest stronger
real consumption in the months ahead. As shown in Figure 3, both ISM indexes remain in
expansionary territory, suggesting that manufacturers see the slowdown as short-lived.
However, the corporate sector has clearly turned much more cautious. The June
employment report, in which private payrolls expanded only 57k, and the May reading,
which was revised lower, to 75k, provide further indication that labor market conditions
have weakened. In addition to tepid payroll growth, the report suggests that growth in
nominal income may have slowed (Figure 4). The softer trend in the payroll proxy for labor
income (hours worked times average hourly earnings) and worsened employment
prospects, if persistent, may cause households to follow the corporate sector and become
more cautious in regards to their spending plans.
A time to agree (its not too late)
Altogether, while the data at home and abroad points toward a rebound in production, several
risks to a broader H2 recovery remain. An important near-term one is the debt ceiling
negotiations, which have likely become more difficult in the face of a weaker job market, as the
administration will be less likely to accept an outcome that threatens the recovery. A failure to
reach an agreement to raise the debt ceiling would certainly curtail growth in H2 11. If an
agreement is reached, the risk to growth in 2012 from fiscal consolidation is still uncertain,
since the details of the composition and timing of the re-profiling of revenues and
expenditures remain in flux. A second risk, highlighted above, is that consumers turn cautiousand push the saving rate higher while reducing expenditures on durables. We will continue to
monitor these risks and look for better real GDP growth in H2 11 as the most likely outcome.
Consumers remain resilient, but
labor market conditions
worsened further
Figure 3: Both ISM indexes remain in expansion territory Figure 4: Growth in labor income may have softened in June
30
35
40
45
50
55
60
65
05 06 07 08 09 10 11
ISM manufacturing indexISM nonmanufacturing index
Diffusion index
-15
-10
-5
0
5
10
15
05 07 09 11
Wage and salary incomePayroll proxy (agg hours * avg hourly earnings)
3m/3m % chg, saar
Note: Shading indicates recession. Source: Institute of Supply Management,Haver Analytics
Note: Shading indicates recession. Source: BLS, Haver Analytics
and the corporate sector
has turned cautious
The pendulum has swung in the
direction of fiscal consolidation
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IN FOCUS: UNITED STATES
Auto sector getting out of reverse gear
The auto sector will be a sizable drag on Q2 GDP growth, but output started to rebound
at the end of June and is set to rise further in July, suggesting a significant boost to Q3GDP growth.
Supply chain disruptions in the aftermath of the Japan earthquake have had a significant
effect on US vehicle output. Auto production declined 9.3% m/m in April and a further 1.5%
in May. Another drop is expected in June. This is likely to translate into a sizable drag on Q2
GDP growth and has had broader implications, too: auto inventories have fallen sharply
among Japanese producers, imports from Japan were down a record $3.0bn (nsa) in April,
and auto sales fell in May and June. However, disruptions have begun to ease and
production should bounce back during Q3, providing a boost to Q3 GDP growth.
A rebound in auto production should become clear in July
The cut in production has been centered in the US-based plants of Japanese producers (thethree largest Toyota, Honda and Nissan account for about 40% of car output and 20%
of truck output). Weekly production data compiled by Automotive News show that Honda,
for example, cut output sharply during April, and Toyota halted production altogether for
the first week of June. As disruptions have eased, Toyotas production has rebounded,
although Honda remains at about half of pre-disruption levels (Figure 1). The effect on
domestic producers, meanwhile, has been much smaller (Figure 2).
Monthly production schedule data from Wards suggest a more significant increase is likely
among the Japanese producers in July. Allowing for seasonal factors and differences
between the two data sources, the Wards production schedules point to about a 15-20%
m/m (sa) increase in auto output in July, although they suggest that another small decline is
likely in June (Figure 3).
providing a boost to Q3 GDP growth
All in all, schedule data point to a solid recovery by the end of Q3, consistent with a rebound
of about 65% q/q (saar), following a decline of about 27% in Q2.
Peter Newland
+1 212 526 [email protected]
Supply chain disruptions have hit
auto output
specifically among the US-based Japanese producers
Production schedules point to a
strong rebound in July
Figure 1: Honda and Toyota cut output sharply Figure 2: but US producers have been largely unaffected
0
4
8
12
16
20
24
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11
Honda Toyota000s, nsa
0
20
40
60
80
100
120
Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11
US makes
Japanese makes
000s, nsa
Source: Automotive News, Barclays Capital Source: Automotive News, Barclays Capital
which should boost Q3
GDP growth
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What does this mean for GDP?
Auto production has accounted for about 2.5% of GDP in recent quarters, so the pattern
suggested above points to a drag on growth of 0.5-1.0pp (annualized) in Q2 and a boost
of 1.0-1.5pp in Q3 (allowing for the fact that the monthly measures of output and
production schedules do not map one-for-one to the series in the GDP report and tend to
be more volatile).
While significant, this is far from unprecedented the auto sector may be relatively small,
but volatility in production and inventory levels have dominated the growth picture in
several quarters in the past. Indeed, the sector contributed more than 1pp to the 1.8% GDP
growth recorded in Q1 this year. Looking further back, vehicle production was a large drag
on growth at the height of the recession in late 2008 and early 2009, reflecting the closure
of GM and Chrysler plants which were both forced to file for bankruptcy protection on the
back of a sharp and sudden drop off in demand. However, aided by government support
and the boost to sales from the cash for clunkers program, output rebounded sharply in
the second half of 2009, a key factor behind the emergence of the economy from recession
(Figure 4).
The expenditure side of the national accounts paints a similar picture
Looking at GDP from the expenditure side (as we do with our tracking estimate) the drop in
auto sales in May and June will materially hit real consumer spending in Q2. Sales fell to
11.8m (saar) units in May and 11.5m in June from 13.1m in April. Again it was the US-based
Japanese producers who were hit hardest. For example, sales at Honda and Toyota were
down about 20% y/y in June, compared with gains of 5-10% at GM and Ford. This suggests
that supply constraints played a significant role. In addition, press reports have highlighted a
cut in incentives and a rise in prices in response to the supply effect as hitting sales more
broadly. Our equity analysts expect a rebound during Q3, driven by the Japanese producers.
Meanwhile, auto inventory accumulation looks set to be a drag on Q2 growth, although this
is likely to be partially offset by a stronger trade picture in part reflecting the drop in
imports from Japan. All in all, our GDP tracking estimate currently suggests that the risks to
our 2.0% forecast for Q2 growth are tilted to the downside, but an auto-driven rebound in
Q3 looks increasingly likely.
The auto sector has distorted
GDP growth in the past
The associated drop in auto
sales will hit Q2 consumption
Figure 3: Auto output and production schedules Figure 4: Motor vehicle contribution to GDP growth
70
75
80
85
90
95
100
Ja n-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr -11 Jul-11
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0IP auto production (lhs)
Ward's production schedule (rhs)
Units, mil (saar)Index (sa), 2007=100
-2
-1
0
1
2
Q198 Q100 Q102 Q104 Q106 Q108 Q110
pp
Forecasts
Source: Federal Reserve, Wards, Barclays Capital Source: BEA, Barclays Capital
but should also rebound in Q3
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DATA REVIEW & PREVIEW: UNITED STATES
Dean Maki, Michael Gapen, Troy Davig, Peter Newland
Review of last weeks data releases
Main indicators Period Previous Barclays Actual Comments
Factory orders, %m/m May -0.9 R 0.9 0.8 Factory orders improved significantly, as we expected
ISM non-manufacturing index Jun 54.6 54.5 53.3 Mixed signals: lower headline, but solid employment
ADP private employment, chg, thous Jun 38 157 Strong, but a misleading signal for the BLS report
Initial jobless claims, thous (4wma) 1-Jul 429 (426) 425 418 Jobless claims declined by more than expected
Nonfarm payrolls, chg, thous Jun 25 R 75 18 Very weak employment report
Private nonfarm payrolls, chg, thous Jun 73 R 100 57 Declines in construction and finance payrolls
Unemployment rate, % Jun 9.1 9.1 9.2 Fully reflected weakness in employment
Average hourly earnings, % m/m (y/y) Jun 0.3 (1.9) R 0.1 (1.9) 0.0 (1.9) Payroll proxy of labor income rose 4.6% in Q2
Average weekly hours Jun 34.4 34.4 34.3 Aggregate hours rose 2.8% in Q2
Preview of the next week
Monday 11 July
No significant events or data releases scheduled
Tuesday 12 July Period Prev 2 Prev 1 Latest Forecast Consensus
8:30 Trade balance, $bn May -46.0 -46.8 -43.7 -43.5 -44.1
14:00 Fed releases minutes from June 21-22 FOMC meeting
Trade balance: The ISM imports index suggests modest real import growth in May. And given that import prices rose that
month, we also expect a rise in nominal imports. The ISM export index still points to steady export growth, though it was slightly
softer in May relative to its much stronger readings earlier in the year. Export prices slightly outpaced import prices in May,
leading us to forecast a modest narrowing of the trade deficit, from $43.7 to $43.5bn.
FOMC minutes: We look for the minutes of the June FOMC meeting to provide additional insight into the committees view that
much of the slowing in recent months stemmed from the temporary impact of higher commodity prices and supply-chaindisruptions from the earthquake in Japan. Given the chairmans heavy focus on commodity prices in his June 7 speech in Atlanta
and the dropping of a reference to core or underlying inflation in the statement, we look for the minutes to provide additional
context on the determinants of commodity price pressures, the relative advantage of focusing on core versus headline inflation,
and the recent behavior of actual and expected inflation. Finally, we look for the minutes to suggest that the trade-off for further
stimulus has worsened and that the bar for additional asset purchases remains high.
Wednesday 13 July Period Prev 2 Prev 1 Latest Forecast Consensus
8:30 Import prices, % m/m (y/y) Jun 3.0 (10.3) 2.1 (11.4) 0.2 (12.5) -0.4 (13.3) -0.7 (13.3)
9:10 Boston Fed President Rosengren (FOMC non-voter) speaks on economic outlook in Worcester
10:00 Fed Chairman Bernanke delivers semi-annual monetary policy report to house
13:20 Dallas Fed Fisher (FOMC voter) speaks on economy in Dallas
14:00 Treasury budget balance, $bn Jun 33.5 (08) -94.3 (09) -68.4 (10) -66.0 (11) -65.0 (11)
Import prices:We expect a 0.4% decline in import prices in June. This largely reflects a decline in petroleum prices, partly offsetby our expectation of a 0.3% rise in ex-petroleum prices, reflecting a softer dollar and rising cost pressures abroad.
Treasury budget balance: We forecast the June federal deficit to be $66bn, bringing it to $993bn for the first nine months of the
current fiscal year.
Thursday 14 July Period Prev 2 Prev 1 Latest Forecast Consensus
8:30 PPI, % m/m (y/y) Jun 0.7 (5.8) 0.8 (6.8) 0.2 (7.3) 0.0 (7.4) -0.2 (7.4)
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8:30 Core PPI, % m/m (y/y) Jun 0.3 (1.9) 0.3 (2.1) 0.2 (2.1) 0.2 (2.1) 0.2 (2.2)
8:30 Retail sales, % m/m Jun 0.8 0.3 -0.2 -0.2 0.0
8:30 Retail sales excluding autos, % m/m Jun 1.2 0.5 0.3 -0.1 0.1
8:30 Core retail sales, % m/m Jun 0.6 0.3 0.2 0.3 0.4
8:30 Initial jobless claims, thous (4wma) 8-Jul 429 (426) 432 (428) 418 (425) 415 (424)
10:00 Fed Chairman Bernanke delivers semi-annual monetary policy report to Senate
10:00 Business inventories, % m/m May 0.7 1.3 0.8 0.8 0.6
PPI:We expect a 0.0% reading on the headline PPI in June, and a 0.2% rise in the core PPI. Within non-core items, a sizeable dropin gasoline prices during the month should be partly tempered by the rebound we expect in food prices (following a 1.4% decline
in May). Within the core, our 0.2% forecast is consistent with our view that pipeline price pressures are gradually building across
most consumer-related components.
Retail sales:We expect retail sales to fall 0.2% in June, reflecting declines in auto and gasoline sales. On the former, reports showthat sales were down sharply among US-based Japanese producers during the month, suggesting that supply constraints in the
aftermath of the earthquake in Japan were again a factor. On the latter, the decline in gasoline prices is likely to be reflected in
nominal sales, too. Excluding autos, gasoline and building materials, we are looking for a solid 0.3% increase in the core retail
sales measure, consistent with the rebound in weekly chain store sales during June.
Friday 15 July Period Prev 2 Prev 1 Latest Forecast Consensus
8:30 CPI, % m/m (y/y) Jun 0.5 (2.7) 0.4 (3.2) 0.2 (3.6) -0.3 (3.5) -0.1 (3.6)
8:30 Core CPI, % m/m (y/y) Jun 0.1 (1.2) 0.2 (1.3) 0.3 (1.5) 0.2 (1.5) 0.2 (1.6)
8:30 CPI, NSA index Jun 223.467 224.906 225.964 225.6
8:30 Empire State mfg index Jul 21.70 11.88 -7.79 10.00 4.00
9:15 Industrial production, % m/m Jun 0.6 0.0 0.1 0.3 0.4
9:15 Capacity utilization, % Jun 76.8 76.7 76.7 77.0 77.0
9:55 U. Michigan consumer sentiment index Jul p 69.8 74.3 71.5 73.0 72.5
CPI:We expect a 0.3% decline in the CPI and a 0.2% increase in the core CPI in June, consistent with an NSA CPI index print of225.6, down from 225.964 in May. Within non-core components, we expect a significant negative contribution from gasoline
prices, with the decline during the month likely to be amplified by a negative seasonal factor. We expect this to be only partly
offset by a small positive contribution from food prices. Within the core, we expect the recent trend of small increases in the
heavily weighted Owners Equivalent Rent (OER) index to continue, boosting core services prices. Meanwhile, core goods inflation
is likely to come in softer than May, when prices were boosted by sharp gains in the volatile apparel and vehicle components.
Empire State manufacturing:We expect the Empire State manufacturing index to rebound to 10.0 in July after falling to -7.8 in June. Growth in manufacturing activity slowed sharply during Q2, but we think this stemmed largely from transient factors,
including supply disruptions in the auto sector. We expect a rebound in Q3.
Industrial production: We expect industrial production to rise 0.3% and manufacturing output to rise 0.2% in June.Manufacturing activity was hit by a decline in auto production in April and May, resulting from supply-chain disruptions following
the earthquake in Japan. We expect another small drop in auto output in June. However, strength in the ISM manufacturing
survey points to solid growth in manufacturing activity more broadly.
University of Michigan consumer sentiment: We expect the University of Michigans index of consumer sentiment to increase to
73 (previous: 71.5) in the July preliminary survey. We see the recent rally in equity markets and lower gasoline prices as the main
factors driving the improvement. The stabilization of gasoline prices should lead to some further moderation of near-term
inflation expectations.
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OUTLOOK: EURO AREA
Austerity hurts and inflation bites
Following the strong growth in Q1 this year, and given what we believe was a weakQ2, real GDP growth in H2 is set to be more modest than thought previously.
Even in Germany so far the powerhouse of growth among the large core countries indications increasingly suggest that its activity expansion is about to moderate notably.
Despite this, the ECB remains in gradual tightening mode so as to normalise rates.After yesterdays rate hike, we expect another 25bp hike to occur in December.
Following its very strong first quarter activity expansion (Q1 real GDP growth reached
0.84%), euro area growth faced increasing headwinds in the second quarter, suggesting
that real GDP growth slowed to 0.3% in Q2. This was not a surprise: the previous growth
pace was unsustainable, driven to a large extent by the favourable effects of unwinding
weather-induced distortions to construction and transport activity, and supported by still-
strong foreign demand.
Rising inflation and higher financing costs have started to erode domestic purchasing
power, as evidenced by weak car and retail sales (Figures 1 and 2). Moreover, the adverse
effects of fiscal austerity applied across almost all euro area countries, a broad-based
slowdown in foreign demand (partially reflecting temporary adverse effects in Japan and the
US, but also weaker demand in large parts of Asia for consumer durables such as cars) and
rising uncertainties related to the resolution of problems faced by the periphery countries
(most notably Greece, Portugal and Ireland) have been and are likely to continue to be a
drag on real GDP growth. This weeks (surprisingly ambitious) announcement by Italy of
EUR68bn in additional fiscal tightening over the next three years proves a good case in point
in this regard.
Along those lines, we expect Germany so far the powerhouse of growth and the main driving
force behind above-potential growth in the euro area to expand more modestly. In fact,
survey indicators have been pointing to growth moderation in the quarters to come, and
recent factory orders have revealed a notable slowdown in foreign demand (Figures 3 and 4),
Frank Engels
+49 (0)69 7161 [email protected]
Real GDP growth has been
facing increasing headwinds
Rising inflation, fiscal austerity
and slowing foreign demand are
the main drivers of this
deceleration in growth
Figure 1: Car sales have taken a turn weaker Figure 2: as have euro area retail sales
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
00 01 02 03 04 05 06 07 08 09 10 11
Germany
Italy
France
Spain
85
90
95
100
105
110
115
120
125
130
05 06 07 08 09 10 11
France
Ireland
EuroGermany
Greece
Portugal
Italy
Spain
Source: Haver Analytics, Barclays Capital Source: Haver Analytics, Barclays Capital
Germany likely to expand
more modestly
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while domestic demand held up reasonably well. Similarly, car and truck production, as well
as vehicle exports, have turned lower in Q2, thus resembling recent trends in car sales in
important export markets, specifically of German car producers across Asia (for more
details, see Emerging Asia: Auto sales - Pulling over, 6 July 2011). As a consequence, we
have lowered our euro area growth forecasts moderately for Q3 and Q4 11 (by 0.1pp each)
and for 2012 (by 0.2pp), thus implying annual real GDP growth rates of 1.9% and 1.6%,
respectively. Weaker private consumption and foreign demand growth are the main driversbehind this revision.
The recent decline in the macro momentum has not gone unnoticed by the ECB in its policy
statement. The tone of the economic analysis has been softened somewhat to reflect the
weaker incoming data and greater uncertainty. Despite this, as widely expected, the ECB
announced a 25bp increase in its policy rate from 1.25% to 1.50%, arguing that medium-
term inflation risks were still skewed to the upside and the risk of second-round inflation
pressures thus had to be addressed, particularly since monetary liquidity remained ample
and the overall policy stance still accommodative. Moreover, in line with our expectations,
the ECB provided no further indications as to future policy adjustments and reiterated that
uncertainty remained elevated. Against this backdrop, we continue to expect the ECB to
pause the tightening cycle until late this year, with the next 25bp rate hike most likely inDecember. As in previous ECB policy meetings, the tensions in European government bond
markets did not feature prominently in the introductory statement, even though the ECB
decided to lift minimum rating restrictions on Portuguese debt pledged as collateral in its
repo operations. Instead, the crisis in the periphery received focal attention at the press
conference. It became clear that the ECB remains of the view that fiscal policies ought to
address the problems and that any euro area-wide solution would need to be sought and
coordinated by euro area governments. We take issue with this stance because, in our view,
even marginally negative news such as this weeks rating downgrade of Portugal by
Moodys results in substantial spread widening across periphery bonds, reflecting poor
liquidity. We believe that European policymakers need to realise that both the EFSF and ECB
should lend support to liquidity and prices of periphery sovereign bonds to contain
financing costs and, thereby, limit contagion.
The recent decline in the macro
momentum has not gone
unnoticed by the ECB
yet the policy rate has been
raised to 1.5%
Minimum rating restrictions on
Portuguese debt have been
suspended by the ECB
We believe it is time for European
policymakers to address the lack
of price and liquidity support in
periphery bond markets
Figure 3: Foreign core manufacturing orders and Ifoexpectations seem to roll over
Figure 4: and PMI survey information points to downsiderisks to future growth
0
20
40
60
80
100
120
140
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10
-50
-40
-30
-20
-10
0
10
20
Foreign Manufacturing Core
Orders, LHS
IFO Business expectat ions,
RHS
-5
-4
-3
-2
-1
0
1
2
3
Nov-01 May-03 Nov-04 May-06 Nov-07 May-09 Nov-10
PMI productionPMI new orders - finished goods inventoryManufacturing production
Source: Haver Analytics, Barclays Capital Source: Markit, Haver Analytics, Barclays Capital
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DATA REVIEW & PREVIEW: EURO AREA
Julian Callow, Fabio Fois, Frank Engels, Franois Cabau, Marion Laboure, Marcus Widen, Thorsten Polleit
Review of last weeks data releases
Main indicators Period Previous BarCap Actual Comments
E17: PPI, % m/m (y/y) May 0.9 (6.7) R -0.1 - 0.2 (6.2) Shows further evidence of pipeline pressure
E17: Retail sales, % m/m (y/y) May 0.7 (0.8) R -1.3 -1.1 Imply weakness in private consumption in Q2
E17: Final composite PMI, index Jun 53.6 P 53.6 53.3New orders index at its lowest level sinceNovember 2009; services should be the mainsupport to growth in Q2
Sweden: Interest rates announcement, % Jul 1.75 2.00 2.00
Hiked the repo rate to 2.0%, and left its policy rateforecast unchanged, implying a high probability oftwo more hikes during the three remaining meetingsthis year and further normalisation during 2012
E17: Final GDP, % q/q Q1 0.8 P 0.9 0.8 No revision from the preliminary figure
Germany: Factory orders, %m/m (y/y) May 2.9 (10.6) -1.3 (8.7) 1.8 (12.2)Owing to strong rise in domestic capital goodsorders; foreign orders down strongly
France: Trade balance, bn May -7.2 R -5.7 -7.4 French export momentum fades
Germany: Industrial production, % m/m May -0.8 R 0.7 (7.2) 1.2Industrial production growth has remainedresilient for now despite global headwinds
E17: ECB Interest rate announcement, % Jul 1.25 1.50 1.50 As widely expected
Germany: Trade Balance sa, bn May 11.9 R 12.1 12.8 Defying global trends
Italy: Industrial production, % m/m May 1.1 (3.8) R -0.5 (2.1) -0.6 (1.8)May's decline in IP still consistent with positive q/qGDP growth in Q2
Preview of week ahead
Sunday 10 July Period Prev 2 Prev 1 Latest Forecast Consensus
06:30 E17: ECB President Trichet speaks at the annual Aix-en-provence economic forum in France
07:15 Global: Banque de France Governor Noyer & OECD Secretary General Gurria speak at Economic Forum in France
Monday 11 July Period Prev 2 Prev 1 Latest Forecast Consensus- EU: Eurogroup meeting
- France: French Senate examines revised bill seeking to impose constitutional rules on balancing the Government's Budget
13:00 E17: Banque de France Governor Noyer speaks on security of payment cards
15:00 E17: ECB Executive Board member Bini Smaghi speaks at a panel debate organised by the Ruling Companies Association
06:45 France: Industrial production, % m/m (y/y) May 0.4 (5.8) -1.1 (3.2) -0.3 (2.6) 0.5 0.5
08:00 Norway: CPI, % m/m (% y/y) Jun 0.3 (1.0) 0.5 (1.3) -0.2 (1.6) - -
Euro area Eurogroup/Ecofin meetings: We expect the Eurogroup/Ecofin meetings to focus on the results of the EU bank stress
tests and discuss implications for possible backstops. The meeting will also focus on the ongoing discussions with the private
sector on private sector involvement (PSI) and how to proceed on Greece.
France Industrial Production: We forecast French industrial production to have increased 0.5% m/m (+0.5% y/y) in May
(consensus: 0.5%; previous: -0.3% m/m and 2.6% y/y), led by a 0.3% m/m (+4.2% y/y) increase in manufacturing production
and a 3.7% m/m (-4.7% y/y) increase in energy production. Such an outcome would leave April-May industrial production 0.7%
below Q1 (which itself was 1.8% above Q4).
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Tuesday 12 July Period Prev 2 Prev 1 Latest Forecast Consensus
- EU: EU Economic & Financial Affairs Council (ECOFIN) Meeting in Brussels
07:30 EU: EU Competition commissioner Almunia testifies before EU Parliament's economic committee
05:30 France: HICP, % m/m (y/y) Jun 0.9 (2.2) 0.4 (2.2) 0.1 (2.2) 0.0 (2.2) 0.0 (2.2)
05:30 France: CPI, % m/m (y/y) Jun 0.8 (2.0) 0.3 (2.1) 0.1 (2.0) 0.0 (2.1) -
05:30 France: CPI ex tobacco index Jun 121.90 122.32 122.40 122.45 -
06:00 Germany: Final HICP, % m/m (y/y) Jun 0.3 (2.7) -0.2 (2.4) 0.0 (2.4) P 0.0 (2.4) 0.0 (2.4)
06:00 Germany: Final CPI, % m/m (y/y) Jun 0.2 (2.4) 0.0 (2.3) 0.1 (2.3) P 0.1 (2.3) 0.1 (2.3)
07:30 Sweden: CPI Headline, % m/m (y/y) Jun 0.7 (2.9) 0.4 (3.3) 0.2 (3.3) -0.1 (3.2) -
07:30 Sweden: CPIF, % m/m (y/y) Jun 0.4 (1.5) 0.4 (1.8) 0.1 (1.7) -0.1 (1.6) -
09:00 Portugal: HICP, % m/m (y/y) Jun 1.6 (3.9) 0.6 (4.0) -0.1 (3.7) 0.1 (3.6) -
Sweden CPIF: We expect Swedish headline CPI to decrease 0.1% m/m, bringing the inflation rate to 3.2% y/y. On the Riksbank
preferred inflation measure, CPIF, we also forecast a decrease of 0.1% m/m with an inflation rate of 1.6%, slightly lower than the
Riksbank's forecast of 1.7% y/y.
Wednesday 13 July Period Prev 2 Prev 1 Latest Forecast Consensus
07:00 Spain: Final HICP, % m/m (y/y) Jun 0.9 (3.5) -0.1 (3.4) 3.0 P -0.2 (3.0) -0.2 (3.0)
09:00 E17: Industrial production, % m/m (y/y) May 0.6 (7.8) 0.0 (5.8) 0.4 (5.5) 0.6 -Euro area Industrial production: We look for euro area industrial production to increase by 0.6% m/m in May (consensus:
+0.5% m/m), after a modest +0.4% m/m rise in the first month of the quarter. This would then leave industrial production in
May 1.2% above Q1. Assuming a flat reading in June, this would thus be consistent with industrial production having slightly
slowed down in Q2 from 1.8% q/q in Q4 to 1.2% q/q in Q1 and 1.0% q/q in Q2.
Thursday 14 July Period Prev 2 Prev 1 Latest Forecast Consensus
- Global: EU/IMF/ECB hold press conference on Irish progress
- France: Bank holiday (National Day)
08:00 E17: ECB publishes monthly bulletin Jul
06:00 Finland: HICP, % m/m (y/y) Jun 0.6 (3.5) 0.2 (3.4) -0.1 (3.4) 0.1 (3.3) -
07:00 Slovakia: HICP, % m/m ( y/y) Jun 0.4 (3.8) 0.5 (3.9) 0.3 (4.2) 0.1 (4.3) -
08:00 Austria: HICP, % y/y Jun 1.2 (3.3) 0.6 (3.7) -0.1 (3.7) -0.1 (3.6) -
08:00 Italy: Final HICP, % m/m (y/y) Jun 1.0 (2.9) 0.2 (3.0) 0.1 (3.0) P 0.1 (3.0) 0.1 (3.0)
08:00 Italy: Final CPI, % m/m (y/y) Jun 0.5 (2.6) 0.1 (2.6) 0.1 (2.7) P 0.1 (2.7) 0.1 (2.7)
09:00 E17: Final HICP, % m/m (y/y) Jun 0.6 (2.8) 0.0 (2.7) (2.7) P -0.1 (2.7) 0.0 (2.7)
09:00 E17: HICP ex tobacco, index (2005 = 100) Jun 112.11 112.75 112.74 112.67 -
09:00E17: 'Eurostat' core (HICP x fd, alc, tob, ene), %m/m (y/y) Jun
1.4 (1.3) 0.5 (1.6) 0.0 (1.5) 0.0 (1.5) -
10:00 Ireland: HICP, % m/m (y/y) Jun 0.5 (1.2) 0.3 (1.5) 0.0 (1.2) 0.1 (1.4) -
Euro area HICP: We are in line with the consensus in expecting the euro area final HICP to be confirmed at 2.7% y/y in June,
unchanged versus May, though we are slightly below-consensus in expecting it to have declined -0.1% on the month against
market expectations for a flat reading. Also in line with the consensus, we expect the Eurostat core HICP to have held steady at
1.5% y/y. We project the euro area HICPx to have to have edged down to 112.67 from 112.74 (no consensus available).Friday 15 July Period Prev 2 Prev 1 Latest Forecast Consensus
- EU: European bank stress test results expected to be released
10:00 E17: ECB Executive Board member Bini Smaghi inaugurates an art exhibition
06:00 EU 27: New car registrations, % y/y Jun -5.0 -4.1 7.1 - -
09:00 E17: Trade balance, bn (sa) May -2.7 -2.2 -2.9 -1.6 -3.3
Euro area Trade balance: Notably, on the back of a 0.9bn increase in the German trade balance surplus to 12.8bn, and only
a slight increase of the French trade deficit by 0.2bn in May, we expect the euro area trade deficit to improve from 2.9bn to
1.6bn, which would therefore more than offset last months increase from -2.2bn.
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OUTLOOK: UNITED KINGDOM
Q1 wan, Q2 too
The available data suggest that growth in Q2 was even weaker than the disappointing0.5% expansion in Q1, and we now expect growth to have been just 0.2% q/q.
The PMIs point to a slowing in Q2, and the available official data on services,construction and IP similarly point to a weak GDP estimate.
Such tepid growth rates are likely to keep the MPC nervous about tighteningmonetary policy and to increase the pressure for a further expansion of QE.
The UK data conveyor belt has paraded a long line of disappointing activity numbers. The
weather-related contraction in Q4 10 was followed by only a pallid rebound in Q1, implying
zero growth over the two quarters. The indicators for Q2 have been similarly unimpressive.
This week we received the final set of PMIs for Q2 and the last of the official data that will
feed into the first estimate of Q2 GDP, which is due to be published on 26 July. Although it is
important to be mindful of the uncertainty surrounding forecasts of preliminary GDPestimates, the indications so far are that Q2 growth was lower than the 0.5% q/q in Q1, and
we now expect growth to have been just 0.2% q/q (our previous forecast was 0.3%).
Our composite PMI was 53.7 in Q2, down from 56.6 in Q1. A mechanical mapping across to
GDP points to a 0.3% q/q expansion, which is a touch above our new forecast (Figure 1).
The drop-off in momentum was largest in manufacturing, for which the output index fell
from 61.6 in Q1 to 53.0 in Q2, the largest quarterly decline in its 19-year history. The
services and construction PMIs also fell on the quarter, although by appreciably less.
The PMIs have failed to match the variability in the official GDP estimates in recent quarters
one reason the Q4 contraction came as such a surprise. Q2 activity is also likely to have
been affected by some temporary factors, in particular the extra public holiday for the royal
wedding in April and supply-chain dislocation that followed the Japanese tsunami. Oil and
gas output was also affected by maintenance-related closures. The extent to which these
disruptions have been reflected in the PMIs is unclear, so we caution against taking the PMI-
based indicator as the final word on Q2 growth.
Simon Hayes
+44 (0) 20 7773 [email protected]
Our composite PMI points to a
slowing in GDP in Q2
Figure 1: GDP and the composite PMI
-2.5
-2.0
-1.5
-1.0
-0.5
0.00.5
1.0
1.5
2.0
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
% q/q
GDP
Estimate based on composite PMI
BarCap Q2 forecast
Source: Haver Analytics, Barclays Capital
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This week also brought official May data for industrial production and construction output.
These are the last of the official output data that will be published ahead of the preliminary
estimate of Q2 GDP. Before considering the outturns, it is worth reiterating the sparseness
of the available information set at this stage. The white segments in Figure 2 denote data
that we do not yet have to estimate overall GDP growth. The biggest blind spot relates to
services: without the May and June Index of Services, we are in the dark for about 50% of
Q2 activity. In fact, the available data cover just 41% of GDP. Our forecast of the preliminaryestimate therefore requires us to guess what the ONS will include for these components. (In
fact, given that the ONS itself has only about 60% of the full information needed, we have to
guess the ONSs guesses.)
According to the Index of Services, services output fell by 1.2% m/m in April. Some of this
weakness can be attributed to the extra public holiday, but exactly how much is unknown. If
we unwind all of this fall in May and assume an additional 0.5% m/m rise in June, then
services output would have grown by 0.5% q/q in Q2, down from 0.9% in Q1, contributing
0.4pp to q/q GDP growth. IP in May was held back by maintenance-related closures that
produced a 5.7% m/m drop in oil and gas output. We should therefore expect some
rebound in June, and factoring in a 0.5% m/m increase, we forecast that IP fell by 1.3% q/q
in Q2 after falling by 0.1% in Q1. This would subtract 0.2pp from q/q GDP growth. Lastly,we expect construction output to have been close to flat in Q2 after the large 3.4% q/q
contraction in Q1. Putting these together points to growth of 0.2% q/q.
The MPC voted to keep policy on hold this week, as had been expected. The committee has
become increasingly concerned about the growth outlook, noting in the minutes of the June
meeting that extending QE remained an option. Although Q2 GDP is likely to have been
depressed artificially by temporary factors, if the ONS publishes a number as low as we
expect, the calls for more QE are likely to grow louder. However, we would continue to
highlight the influence of high and rising inflation on this decision. Although soft activity is
likely to mean that an interest rate hike is unlikely over the next several months, if we are
right to expect inflation to rise above 5% in the autumn, we still doubt a majority of MPC
members would be comfortable sanctioning more QE.
Information gaps mean there
is always great uncertainty in
forecasting the preliminary
GDP estimate
Figure 2: Published information on Q2 GDP
Apr IoS
25%May IoS
25%
Apr IP
6%
May IP
6%Jun IP
6% Apr Construction
2%
May Construction
2%
Agriculture
1%
Jun IoS
25%
Jun Construction
2%
Note: White segments indicate components for which no information has been published.Source: Haver Analytics, Barclays Capital
The available data suggest
our 0.3% q/q forecast is in
the right ballpark, with risks
to the downside
Such weak growth is likely to
prompt calls for more QE
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DATA REVIEW & PREVIEW: UNITED KINGDOM
Blerina Urui
Review of last weeks data releases
Main Indicators Period Previous Barclays Actual Comments
Construction PMI Jun 54.0 53.0 53.6 Output growth remains solidServices PMI Jun 53.8 53.2 53.9 Services sector continues expansion
Halifax house price index, % m/m (3m/y) Jun 0.1 (-4.2) - 1.2 (-3.5) Market conditions remain challenging
Industrial output, % m/m (y/y) May -1.7 (-1.2) 1.0 (-0.6) 0.9 (-0.8)
Manufacturing output, % m/m (y/y) May -1.6 (1.2) R 0.8 (1.9) 1.8 (2.8)Rebound in IP, but growth ratedampened by falling oil and gas output
BOE Bank Rate decision, % Jul 0.5 0.5 0.5
BOE asset purchase decision, bn Jul 200 200 200.0MPC held monetary policy unchangedas expected
PPI input prices, % m/m (y/y) Jun -1.7 (16.1)R 0.2 (16.4) 0.4 (17.0)
PPI output prices, % m/m (y/y) Jun 0.2 (5.4 R) 0.0 (5.5) 0.1 (5.7)
PPI core output prices, % m/m (y/y) Jun 0.2 (3.4) 0.1 (3.1) 0.2 (3.2)
UK producer prices increased at amoderate pace on the month to June,but pipeline inflationary pressuresremain strong
Preview of week ahead
Monday 11 July Period Prev 2 Prev 1 Latest Forecast ConsensusNo data releases or policy speeches scheduled
Tuesday 12 July Period Prev 2 Prev 1 Latest Forecast Consensus
00:01 RICS house price balance Jun -23 -21 -28 -26 -25
00:01 BRC total sales, % y/y Jun -1.9 6.9 -0.3 - -
09:30 CPI, % m/m (y/y) Jun 0.3 (4.0) 1.0 (4.5) 0.2 (4.5) 0.3 (4.5) 0.3 (4.5)
09:30 RPI, % m/m (y/y) Jun 0.5 (5.3) 0.8 (5.2) 0.3 (5.2) 0.3 (5.3) 0.3 (5.2)
09:30 RPIx, % m/m (y/y) Jun 0.5 (5.4) 0.9 (5.3) 0.3 (5.3) 0.3 (5.4) (5.3)
09:30 Visible trade balance, bn May -6.9 -7.7 -7.4 -7.3 -7.4
RICS house price balance: We expect a small increase in the price balance to -26 from -28 in May; however, the data would
still be consistent with tough conditions in the housing market mainly owing to weak demand. Data from other surveys such
as the Nationwide and the Halifax indices also suggested the housing market remained broadly subdued in June.
Inflation data: We expect June CPI inflation to have remained at 4.5% y/y, and RPI inflation to have increased to 5.3% from
5.2% in May. We expect further price pressure from food and energy to be partially offset by a decline in inflation for non-
energy industrial goods, in part owing to early summer discounting as retailers responded to disappointing sales in May.
Visible trade balance: We forecast a slight narrowing in the trade deficit to 7.3bn in May from 7.4bn previously. We expect
the fall in oil and gas extraction during May from maintenance-related closures to have increased the oil deficit, but weaker
demand for imports to have offset its effect.
Wednesday 13 July Period Prev 2 Prev 1 Latest Forecast Consensus
09:30 Average earnings, % 3m/y May 2.2 2.5 1.8 2.3 2.1
09:30 Core average earnings, % 3m/y May 2.1 2.1 2.0 1.9 2.0
09:30 Claimant count unemployment, k Jun 6.4 16.9 19.6 14.9 15.0
09:30 ILO unemployment rate, % May 7.8 7.7 7.7 7.7 7.7
Labour market: We forecast headline average weekly earnings to have increased by 2.3% 3m/y in May from 1.8% 3m/y
previously and core earnings growth at 1.9% 3m/y from 2.0% 3m/y previously. We expect the claimant count to have
increased by 14.9k from 19.6k previously, in line with our assessment of a deterioration in labour market conditions for Q2
and as indicated by the weakness in the REC jobs survey data. We forecast the ILO measure of unemployment to have
remained unchanged at 7.7%.
Thursday 14 July Period Prev 2 Prev 1 Latest Forecast Consensus
No data releases or policy speeches scheduled
Friday 15 July Period Prev 2 Prev 1 Latest Forecast Consensus
No data releases or policy speeches scheduled
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OUTLOOK: JAPAN
An interim assessment
The BoJ will revisit its GDP and CPI forecasts next week, likely projecting slightlylower real growth and modest core inflation for FY11.
While such inflation could virtually be erased by the CPI rebasing, perceptions haveclearly changed, both among households and businesses.
Consumers are starting to spend and higher bonuses may help, but sluggish basewages, together with several economic and political risks, cloud the outlook.
The BoJ will revisit its GDP and CPI forecasts when it conducts an interim assessment of its
semi-annual Outlook Report on 11-12 July. Although the real GDP forecast could be lowered
slightly for FY11, we expect few other changes (Figure 1). If so, the new forecasts will
project a picture of marginal real growth and modest core inflation for the current year.
Note, however, that these forecasts do not factor in the August CPI rebasing, which we
estimate will lower the core CPI by about 0.6pp. All else being equal, this means technicalfactors are likely to result in forecasts for slightly stronger real growth and virtually zero
inflation in October, when the BoJ publishes its next Outlook Report.
Even so, price perceptions are clearly changing. A Cabinet Office survey, for example, finds
that nearly 70% of Japanese households expect prices to be higher one year forward. In this
context, the latest Tankan report suggests terms of trade are improving, at least for large
companies. This is also evident in the corporate goods price index, which shows rising
prices not only for market-sensitive goods and basic materials but also for processed goods.
Over the next six months or so, we believe the core CPI is likely to be somewhat weaker
than we had previously forecast, but mainly due to a downward revision to our oil price
assumptions. Further forward, however, there is likely to be an offsetting effect as the
output gap is reduced by the earthquake impact on potential GDP (downward) and
reconstruction efforts on real GDP (upward).
For now, we expect real GDP to see a V-shaped recovery from Q3 2011 to Q1 2012. As
discussed last week, this partly reflects an expectation for private capex to start increasing in
Q3 on support from post-earthquake reconstruction demand an outlook unchanged by
this weeks machinery orders data. On a more microeconomic level, our chief equity
strategist points out in this weeks Japan Cross Asset Monthlythat companies with high
levels of free cash flow and relatively high returns on equity have become more aggressive
in their capital investment.
This week also provided evidence that consumption is finding firmer ground. New auto
sales (new passenger vehicle registrations and minicar sales), for example, showed anotherstrong increase (m/m, sa) in June after the steep quake-induced drops of March and April.
Base effects alone will give them a boost of 18.5% in Jul-Sep even if monthly sales are flat
during that period. The composite index of consumption also rose for a second consecutive
month, even in the face of bad weather and adverse calendar effects. In this light, our
forecast of a Q2 upturn in GDP-based private consumption is unchanged. In addition to
buying cars, consumers also spent money to cope with restrictions on electric power,
purchasing high-efficiency air conditioners and cool summer apparel, for example. Sales of
flat-panel TVs also showed strong growth prior to a switch to digital terrestrial broadcasting
on 24 July 2011.
Kyohei Morita
+81 (3) 4530 [email protected]
Yuichiro Nagai
+81 (3) 4530 1064
James Barber, CFA
+81 (3) 4530 1542
BoJ reassesses prior to the
rebasing
Price perceptions changing
regardless of the technicalities
Outlook for a V-shaped recovery
supported by recent data on
capex
and consumption
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Higher summer bonuses, which led to a surprise increase in wages per worker, may have
helped. However, scheduled pay (the core component of wages) fell for a fifth consecutive
month, suggesting that companies still prefer to treat labor as a variable cost rather than a
fixed cost. Wages have become more volatile as a result.
It is easy to understand why, despite improving sentiment, companies remain apprehensive
about increasing base wages. There are a number of risks to the economy. Althoughindustrial production is near pre-earthquake levels, it looks set to flatten out in Jul-Sep due
to constraints on electric power over the summer months. For now, we view this as a
temporary drag on growth. As discussed in our Japan Cross Asset Monthly, however, it is
also part of a larger energy problem involving questions about the future feasibility of
nuclear power. In a nutshell, the use of thermal power makes it more expensive to do
business in Japan. In our view, this together with, for example, a proposal to raise
corporate taxes to finance reconstruction and a failure to engage more proactively in trade
agreements such as the Transport-Pacific Partnership (TPP) agreement threatens to
accelerate the exodus of businesses and employment opportunities from Japan.
We also continue to monitor the risks associated with overseas economic deceleration. This
weeks machinery orders data, while firm for the core component, saw a third consecutive
decline in overseas orders. Viewed together with machine tools data, where the overseas
component began to fall even prior to the earthquake, these figures suggest a possible
impact from a slowdown abroad. The deceleration in China, which accounts for nearly 20%
of Japanese exports (2010), is a particular concern, at least over the short term. In its
previous economic assessment, the BoJ added signs of deceleration in emerging markets
to its list of risk factors. This is likely to be unchanged in next weeks report.
The BoJ is also likely to reiterate that attention should be paid for the time being to the
downside risks to economic activity, especially the possible effects of the disaster. Combined
with last months quasi-fiscal action, which helped specific companies and addressed
solvency concerns (see Japan Outlook Global Economic Weekly, 20 June 2011), such
remarks are about as close as the BoJ will get to telling the government to hasten the process
of compiling a third supplementary budget. We now know that budget passage is likely to be
delayed until at least late-autumn, but even that timeframe remains uncertain under current
political conditions. The pattern of economic growth could easily be affected by the size and
timing of that budget dubbed the reconstruction budget to distinguish it from its smaller
predecessors compiled for emergency assistance, temporary housing and initial clean-up.
Higher bonuses help, but base
wages remain sluggish
Figure 1: Real GDP and core CPI forecasts BoJ (majority of BoJ Policy Board members) versus BarCap and consensus
As of 28 Apr As of 12 Jul
FY10 median +2.8% +2.8%
(range) +2.8 to +2.8% +2.8 to +2.8%
FY11 median +0.6% Revision to
(range) +0.5 to +0.9% 0.1-0.4%??
FY12 median +2.9% No change??
(range) +2.7 to +3.0%
2.3%
BoJ
BarCap
Real GDP
Consensus
2.3%
0.1%
3.2% 2.9%
0.4%
As of 28 Apr As of 12 Jul
FY10 median -0.3% -0.3%
(range)
FY11 median +0.7% No change?
(range) +0.5 to +0.8%
FY12 median +0.7% No change?
(range) +0.5 to +0.7%
-0.8% -0.8%
BoJ
Core CPI
ConsensusBarCap
0.4%
0.5%0.3%
0.1%
Note: Core CPI excludes fresh foods. Forecasts do not factor in August rebasing, which we estimate will lower the core CPI by 0.6pp.Source: BoJ Outlook Report, EPS survey of Economic Planning Association, Barclays Capital Japan
Reasons behind the reluctance
to increase fixed costs (= risks toour economic outlook): the
energy situation
overseas economic
deceleration
and delays in passing the
third supplementary budget
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DATA REVIEW & PREVIEW: JAPAN
Kyohei Morita, Yuichiro Nagai, James Barber
Review of this weeks data
Main indicators Period Previous BarCap Actual CommentsWages per worker (% y/y) May -0.6 -0.5 1.1 Surprise uptick due to a surge in bonuses. Scheduled
pay, however, fell for a fifth consecutive month.Companies continue to adjust pay on a variable basis.
Core machinery orders (% m/m) May -3.3 2.5 3.0 Core orders will likely be weaker than major machinerymaker forecasts for Q2, but we still expect capex toturn up from Q3. Overseas orders, however, continueto fall.
Current account (JPY bn) May 406 125 591 Trade account showed a wider deficit, but this wasoffset by a large surplus in the income account.
Bank lending including shinkin banks(% y/y)
Jun -0.8 -0.5 -0.6 Despite a pick-up in demand from some companies inthe quake-hit region, loans are likely to continuetrending downward due to surplus liquidity in thecorporate sector
Economy Watchers DI Jun 36.0 NA 49.6 Larger improvement than market consensus, showingthat sentiment is also recovering along with theV-shaped recovery in industrial production.
Preview of the week ahead
Monday 11 July Period Prev 2 Prev 1 Latest Forecast Consensus
08:50 M2/M3 (% y/y) Jun 2.6/1.9 2.7/2.1 2.7/2.1 2.9/2.3 2.7/2.1
Tuesday 12 July Period Prev 2 Prev 1 Latest Forecast Consensus
08:50 Corporate goods price index (% y/y) Jun 2.0 2.5 2.2 2.7 2.4
Index of tertiary industry activity (% m/m) May 0.8 -5.9 2.6 0.5 0.5
BoJ MPM ends No policy change expected. However, the BoJ will update its GDP and CPIforecasts as part of its interim assessment of the semiannual Outlook Report.
We expect a slight downward revision to real GDP for FY 11. Otherwise,forecasts should be largely unchanged. See Outlook section for details.
Week ahead: We estimate that M2 growth (excluding Japan Post Bank) strengthened to 2.9% y/y in June from 2.7% in May.
M3 (including Japan Post Bank) likely rose 2.3%, also stronger than in May (2.1%). More generally, the recent trend in money
stock data has been marked by slower growth in both quasi-money, such as time deposits, and broad liquidity.
We estimate that the domestic CGPI rose 2.7% y/y in June versus a 2.2% gain in May. Month on month, we expect the index to
increase 0.1% after Mays 0.1% decline. This assumes prices rose in textiles, chemicals and plastics, while falling for oil/coal
products and scrap. We expect CGPI inflation to remain around 2-3% y/y for the rest of the year.
For the index of tertiary industry activity, we look for a second consecutive increase in May (0.5% versus Aprils 2.6%). During
this period, sales were lower on the wholesale side, while increasing in retail. Within retail, the sharpest gains were in machinery,
including household appliances, and autos.
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OUTLOOK: CHINA
Rate hike cycle close to an end
The PBoC delivered an overdue benchmark interest rate hike on Wednesday, ahead ofthe release of the June CPI data, which we expect to jump to 6.3% y/y from 5.5% in May.
Minutes of the PBoC monetary policy committee meeting (held in July) emphasisedstability, targeted, and flexibility as well as the pace and intensity of policies.
We forecast Q2 real GDP growth of 9.4% y/y, versus 9.7% in Q1, and expect slower IP andtrade growth, as well as relatively stable domestic demand in June.
On Wednesday, the PBoC announced the third benchmark interest rate hike of 2011. This is
the fifth increase in the current tightening cycle, which started in October 2010. The
structure of the hike was symmetrical a 25bp increase in the lending and deposit rates
across all tenors, except the demand deposit rate, which was left unchanged (Figure 1).
While we had maintained our forecast of a rate hike in early to mid-July, the June rate pause
(versus a widely expected hike) suggested to us increasing domestic concerns about an
over-tightening of monetary policy. The timing of the July rate hike therefore suggests that
policymakers likely consider the risk of full-year inflation exceeding 5% as higher than the
risk of a sharp growth slowdown, especially as June CPI is expected to exceed 6% y/y (see
China: The much-anticipated interest rate hike to end the tightening cycle, or not?, 6 July).
Meanwhile, the wording of the Q2 PBoC Monetary Policy Committee meeting minutes
regarding the operational focus was amended to "Stability, targeted and flexibility" from
"Targeted, flexibility, and effectiveness" as in the Q1 11 and Q4 10 minutes (for details see
China: PBoC Q2 policy committee minute emphasise pace and intensity of policies, 5 July).
On credit expansion, the committee maintained its aim to "guide the banks to improve
credit support to key areas, as well as vulnerable segments of the economy" and added
"especially support to rural credit and SMEs lending".
The next key event to watch is the State Council mid-year regular meeting, usually held in
mid-July to discuss/assess the economic performance in the first half of the year, and set
the tone for policy in H2. Also, the NPC Financial and Economic Committee will hold an
economic assessment forum (on July 15-16 in the past three years), followed by a Politburo
meeting. These meetings should provide further clarification on policy directions in H2.
Jian Chang
+852 2903 [email protected]
Lingxiu Yang
+852 2903 2653
PBoC delivered its third
rate hike this year
Upside risks to inflation higher
than downside risks to growth
MPC minutes wording amended
to emphasise pace and intensity
of policies
Figure 1: The benchmark rate hike structure
Deposit and lending rate hike structure
Current Total 6 Jul 5 Apr 8 Feb 25 Dec 19 Oct Before
% pa (+) bp (+) bp (+) bp (+) bp (+) bp (+) bp % pa
Deposit
Demand 0.50 14 0 10 4 0 0 0.363 m 3.10 139 25 25 35 34 20 1.716 m 3.30 132 25 25 30 30 22 1.981 y 3.50 125 25 25 25 25 25 2.252 y 4.40 161 25 25 35 30 46 2.793 y 5.00 163 25 25 35 30 52 3.335 y 5.50 190 25 25 45 35 60 3.60
Lending1 y 6.56 125 25 25 25 25 25 5.311-3 y 6.65 125 25 30 25 25 20 5.403-5 y 6.90 114 25 20 23 26 20 5.76>5 y 7.05 111 25 20 20 26 20 5.94
Source: PBoC, Barclays Capital
The next key event is the regular
mid-year assessment meetings
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Overall, while we think policy rate hikes are close to an end, we do not rule out the
possibility of a fourth hike in Q3. Our baseline forecast is for CPI inflation to fall below 6% in
July (5.8%) and below 5% in September. A clear upside risk to this forecast would make
another rate hike more likely, in our view. We think the room for more RRR hikes is limited,
though they are possible given liquidity pressures arising from capital inflows. We expect
continued credit controls to contain 2011 M2 growth at 16% and new loans at CNY750bn.
We have held a view that interest rates needed to be raised to reverse the situation of
negative real rates, anchor inflation expectations and limit inefficient investment, given the
elevated inflation pressures in the Chinese economy (both in the near term and structurally